Core Laboratories - Q2 2023

Transcript

Operator (participant)

Good morning, welcome to the Core Lab Q Two 2023 earnings call. All participants will be in the listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star, then one on your telephone keypad. To withdraw your question, please press Star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Larry Bruno, Chairman and CEO. Please go ahead.

Larry Bruno (Chairman and CEO)

Thanks, Danielle. Good morning in the Americas, good afternoon in Europe, Africa, and the Middle East, and good evening in Asia Pacific. We'd like to welcome all of our shareholders, analysts, and most importantly, our employees, to Core Laboratories' second quarter 2023 earnings call. This morning, I'm joined by Chris Hill, Core's Chief Financial Officer, and Gwen Gresham, Core's Senior Vice President and Head of Investor Relations. The call will be divided into six segments. Gwen will start by making remarks regarding forward-looking statements. We'll then have some opening comments, including a high-level review of important factors in Core's Q2 performance. In addition, we'll review Core's strategies and the three financial tenets that the company employs to build long-term shareholder value. Chris will then give a detailed financial overview and have additional comments regarding shareholder value. Following Chris, Gwen will provide some comments on the company's outlook and guidance.

I'll then review Core's two operating segments, detailing our progress and discussing the continued successful introduction and deployment of Core Lab's technologies, as well as highlighting some of Core's operations and major projects worldwide. We'll open the phone for calls and a Q&A session. I'll now turn the call over to Gwen for remarks on forward-looking statements.

Gwen Gresham (SVP and Head of Investor Relations)

Before we start the conference this morning, I'll mention that some of the statements that we make during this call may include projections, estimates, and other forward-looking information. This would include any discussion of the company's business outlook. These types of forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to materially differ from our forward-looking statements. These risks and uncertainties are discussed in our most recent annual report on Form 10-K, as well as other reports and registration statements filed by us with the SEC. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. In our comments, we also include non-GAAP financial measures. Reconciliation to the most directly comparable GAAP financial measures is included in the press release announcing our second quarter results.

Those non-GAAP measures can also be found on our website. With that said, I'll pass the discussion back to Larry.

Larry Bruno (Chairman and CEO)

Thanks, Gwen. Moving now to some high-level comments about the second quarter of 2023. Core continued to build on the operational momentum established over the past few quarters. While revenue was flat compared to Q1 at $128 million, we achieved sequential improvements in operating income, operating margins, net income, free cash flow, and EPS. At the same time, we continued to execute on our key financial strategies, including reducing net debt and strengthening our balance sheet. YoY, the second quarter of 2023 showed a nearly 6% growth in revenue. Ex items, operating income for the second quarter was $15.6 million, up 62% YoY, and operating margins were 12%, with YoY incrementals exceeding 85%.

Second quarter 2023 operating margins, as well as YoY and sequential incremental margins, were particularly strong in Reservoir Description, where demand for reservoir rock and fluid analysis across our global client base continues to rise. These improvements were partially offset by declines in revenue and operating income due to a QoQ reduction in bulk international product sales and lower than anticipated U.S. land completion activity. Still, Production Enhancement margins, ex items, held at 10% in the second quarter. Lastly, for the full company, ex items, EPS was $0.21 per share, up from $0.19 in Q1 of 2023. As we look ahead, Core Lab will continue to execute on its key strategic objectives by, one, introducing new product and service offerings in key geographic markets; two, maintaining a lean and focused organization; and three, maintaining our commitment to delevering the company.

Now to review Core Lab's strategies and the financial tenets that Core has used to build shareholder value over our 27-plus-year history as a publicly traded company. The interests of our shareholders, clients, and employees will always be well served by Core Lab's resilient culture, which relies on innovation, leveraging technology to solve problems, and dedicated customer services. I'll talk more about some of our latest innovations in the operational review section of this call. While we aggressively pursue growth opportunities, the company will remain focused on its three long-standing, long-term financial tenets. Those being to maximize free cash flow, maximize return on invested capital, and returning excess free cash to our shareholders.

Before moving on, I want to thank our employees for their dedication, loyalty, and adaptability in meeting all of our clients' needs and for the commitment that many have shown as we prepare for a more active market. I'll now turn it over to Chris for the detailed financial review.

Chris Hill (CFO)

Thanks, Larry. Before we review the financial performance for the quarter, the guidance we gave on our last call and past calls specifically excluded the impact of any FX gains or losses and assumed an effective tax rate of 20%. Accordingly, our discussion today excludes any foreign exchange gain or loss for current and prior periods.

Additionally, the financial results for the second quarter of 2023 include, one, a tax benefit of approximately $11.6 million associated with the company's redomestication of the parent company from the Netherlands to the U.S., and two, a gain of approximately $2.9 million associated with proceeds received from company-owned life insurance policies and a reversal of previously recognized stock compensation expense for certain performance share awards, which are no longer expected to vest. These items have also been excluded from our discussion of the financial results. Now looking at the income statement. Revenue was $127.9 million in the second quarter, flat compared to the prior quarter and up almost 6% YoY. Sequentially, international upstream projects continued to expand.

This increase was offset by a decrease in product sales as the U.S. onshore activity softened during the second quarter. The YoY growth in revenue was primarily associated with improved activity on international upstream projects and also higher levels of activity in the U.S. when compared to last year. Of this revenue, service revenue, which is more international, was $93.3 million for the quarter, up over 2% sequentially and up over 9% from last year. International service revenue was up 4% sequentially and up over 7% YoY, as activity on projects outside the U.S. continues to build across multiple regions. Service revenue associated with crude assay work performed in our European operations also had some recovery from the decrease last quarter.

Service revenue in the U.S. market was flat sequentially, but up over 13% YoY, primarily due to high use of our diagnostic services in the U.S. land market. Product sales, which is more equally tied to North America and international activity, were $34.6 million for the quarter, down 7% sequentially and down 2% from last year. Product sales in the U.S. decreased 3% sequentially, as activity in the U.S. land market peaked in April and softened in May and June. Our international product sales, which are typically larger bulk orders and can vary from one quarter to another, were also down slightly this quarter compared to last quarter.

Moving on to cost of services, ex items for the quarter was approximately 76% of service revenue, an improvement from 78% in the prior quarter and 80% compared to the prior year. We continue to see improvements in absorption of costs and utilization of our global laboratory network, and anticipate additional improvement with growth in service revenue. Cost of sales, ex items in the second quarter was 84% of revenue, compared to 82% last quarter. The increase this quarter is a combination of reduced manufacturing efficiencies associated with lower activity in the U.S. land market and lower international sales. We anticipate improvement in the manufacturing absorption rate in future quarters, in line with our projected growth in product sales. G&A ex items for the quarter was $8.7 million, a decrease from prior quarter, which was $9.8 million.

For 2023, we expect G&A ex items to be approximately $39 million-$40 million. Depreciation and amortization for the quarter was $3.9 million, relatively flat compared to $4 million last quarter. EBIT ex items for the quarter was $15.6 million, an increase of $1.1 million over last quarter, yielding an EBIT margin of 12.2%, which expanded 90 basis points sequentially and 420 basis points from last year. Our operating income for the quarter on a GAAP basis was $18.9 million, which includes the $2.9 million gain mentioned earlier. Interest expense of $3.2 million decreased from $3.4 million last quarter. Income tax expense at an effective tax rate of 20% and ex items, was $3.2 million for the quarter.

On a GAAP basis, we recorded a tax benefit of $7.3 million for the quarter, which includes the $11.6 million tax benefit associated with the company's redomestication transaction that was completed on May 1st. The effective tax rate will continue to be somewhat sensitive to the geographic mix of earnings across the globe and the impact of items discrete to each quarter. We continue to project the company's effective tax rate to be approximately 20%. Net income, ex items for the quarter was $9.8 million, up from $8.8 million last quarter and $5.4 million from last year. On a GAAP basis, we recorded net income of $22.8 million for the quarter.

Earnings per diluted share, ex items, was 21 cents for the quarter, up from 19 cents last quarter, and compared to last year, a significant improvement over the 12 cents in the second quarter of 2022. On a GAAP basis, earnings per diluted share was 48 cents for the quarter, up from five cents in the prior quarter. Turning to the balance sheet, receivables was $106.8 million and decreased approximately $3.9 million from the prior quarter. Our DSOs for the second quarter improved slightly to 72 days from 73 days in last quarter. We anticipate that our DSO will continue improving as we work back towards a level of 70 days or lower in future quarters. Inventory at June 30 was $71.7 million, up approximately $4.3 million from last quarter end.

Inventory turns for the quarter decreased to 1.7 from 1.9 last quarter. The increase in the quarter is a combined effect of a slowing U.S. land market and also building stock in certain international locations to service some long-term international contracts. On the liability side of the balance sheet, our long-term debt was $185 million at June 30, and considering cash of $26.2 million, net debt was $158.8 million, or down $7.9 million from last quarter. The decrease in net debt this quarter was primarily driven by free cash flow generated from operations. Our leverage ratio improved to 1.85 at June 30th, compared to 2.18 last quarter, and we anticipate the leverage ratio will continue to decrease during the remainder of 2023.

As mentioned during our last call, the company issued $50 million of new senior notes, which funded on June 28, 2023. The new notes were split into two tranches, $25 million in each tranche, which have a five-year and 7-year maturity. The proceeds from the notes were used to reduce the outstanding balance on our revolving credit facility. At June 30, our debt is currently comprised of our senior notes at $185 million, with no outstanding balance under our bank revolving credit facility, which has a borrowing capacity of $135 million. The company will continue applying free cash towards reducing debt until the company reaches its target leverage ratio of 1.5x or lower.

Additionally, as we previously announced on July 17, 2023, the company terminated the ATM program that we launched in June of 2022. No shares of the company's common stock was sold under the program. Looking at cash flow for the second quarter of 2023, cash flow from operating activities was approximately $8.8 million. After paying for $2.2 million of CapEx during the quarter, our free cash flow for the quarter was $6.6 million. We expect CapEx to modestly expand in the second half of 2023, will continue to be aligned with activity levels.

For the full year of 2023, we expect capital expenditures to be in the range of $11 million-$13 million. Core will continue its strict capital discipline and asset-light business model, with capital expenditures primarily targeted at growth opportunities and initiatives. Core Lab's operational leverage continues to provide the ability to grow revenue and profitability with minimal capital requirements. Capital expenditures have historically ranged from 2%-4% of revenue, even during periods of significant growth. That same level of laboratory infrastructure, intellectual property, and leverage exists in the business today. We believe evaluating a company's ability to generate free cash flow and free cash flow yield is an important metric for shareholders when comparing companies' financial results, particularly for those shareholders who utilize discounted cash flow models to assess valuations.

I will now turn it over to Gwen for an update on our guidance and outlook.

Gwen Gresham (SVP and Head of Investor Relations)

Thank you, Chris. Based on conversations with the company's global client base, we maintain our constructive outlook on international upstream spending for the second half of 2023 and beyond, as a higher level of investment will be required to maintain and grow hydrocarbon production. The company anticipates spending to expand toward long-cycle upstream projects in both onshore and offshore environments. In the near term, the global crude oil market may remain volatile due to global recession fears and uncertainty about the extent and timing of China's economic recovery. The recent OPEC+ production cuts being implemented to support the current market are not expected to be maintained or required long term. Additionally, production growth in areas outside of OPEC+ continue to face constraints due to prolonged underinvestment, as well as the loss of production due to natural declines from existing fields.

We continue to anticipate a multiyear international recovery, supported by increased spending on exploration in many regions around the world, and expanded development of existing fields to fortify crude oil and natural gas reserves. This underlies Core's outlook for continued improvement in international onshore and offshore activity, with ongoing projects across the globe, most notably in the Middle East, South Atlantic Margin, and West Africa. Turning to the U.S., land activity for the first half of 2023 was lower than expected, as reflected by the declining U.S. rig and frac spread counts throughout the second quarter. We see U.S. land completion activity for the second half of 2023 to be slightly down compared to the first half of the year. As a result, Core projects reservoir descriptions third quarter 2023 revenue to be up sequentially by low single digits.

While we expect our international revenue to increase sequentially, the segment's revenue will be slightly softened by a projected decrease in U.S. activity. Client commitments on international projects have improved nicely YoY. The cadence at which these long-term projects are executed by Core's clients may vary from quarter to quarter as activity begins to accelerate. The Russia-Ukraine conflict continues to create uncertainties with respect to trading patterns of crude oil and associated crude oil assay services, which may impact Reservoir Description operations in Russia, Ukraine, and Europe. Turning to Production Enhancement. Third quarter revenue is estimated to be flat to down by low single digits sequentially. Growth in Production Enhancement, international sales may offset the projected decline in U.S. revenue.

In summary, Core projects third quarter 2023 revenue to range from $128 million-$132 million, and operating income of $15.2 million-$17.5 million, yielding operating margins of approximately 13%. EPS for the third quarter is expected to range from $0.21-$0.25. The company's third quarter 2023 guidance is based on projections for underlying operations and excludes gains and losses in foreign exchange. Third quarter guidance also assumes an effective tax rate of 20%. Now I will turn the call back over to Larry.

Larry Bruno (Chairman and CEO)

Thanks, Gwen. First, I'd like to thank our global team of employees for providing innovative solutions, integrity, and superior service to our clients. The team's collective dedication to servicing our clients is a foundation of Core Lab's success. In July, the IEA updated its forecast for crude oil demand for 2023 to average a record high 102.1 million barrels per day. That's up approximately two million barrels per day from 2022, even after assessing current global financial forecasts. This continues to bode well for the growing demand for the Reservoir Description services that will be required to grow production and replace the natural decline of existing producing fields.

We look ahead and see the growing international rig count over the past year as a harbinger of an improving landscape for reservoir description, a trend that we project will play out for the next several quarters, particularly in the Middle East, North and South America, as well as most other regions. Early movers in the oil field service sector that are more exposed to well construction, have already felt the impact of this cycle shift. For some operational highlights from the second quarter. Turning first to Reservoir Description. For the second quarter of 2023, revenue came in at $83.4 million, up 4% compared to Q1 and up 10% YoY. Operating income for Reservoir Description ex items was $13.3 million, and operating margins were over 13%.

Margins, ex items, expanded approximately 370 basis points sequentially and 680 basis points YoY. Sequential incremental margins for Reservoir Description exceeded 100%, once again, highlighting the operational leverage that exists in our Reservoir Description business model. The segment's financial performance in the second quarter was underpinned by improving international client activity, as well as indications that demand for crude oil and derived product assay work are continuing to stabilize as trading patterns realign in response to sanctions. With that being said, uncertainties and potential risks associated with the Russia-Ukraine conflict and sanctions still remain. Now for some operational highlights. In the second quarter of 2023, industry adoption, of course, proprietary, web-enabled data management system named RAPID, continued to increase.

Core Lab's RAPID data management platform was adopted by a U.S.-based international operating company conducting exploration and production operations in the Mexican waters of the Gulf of Mexico. RAPID provides this operator with centralized, consistent, and easily accessible data in a secure format. RAPID enables the client to quickly and efficiently organize, retrieve, archive, and analyze large quantities of geological, petrophysical, reservoir engineering, and reservoir fluids data, and will serve as the primary repository for this information. The RAPID platform also allows for sophisticated database queries from a user-friendly interface. When coupled with other Core Lab digital solutions, such as the company's Worldwide Rock Catalog, Relative Permeability Toolkit, and other proprietary data tools, RAPID can be used to search for reservoir analogues, predict petrophysical and engineering parameters, and also to integrate newly acquired laboratory data.

Core Lab continues its leadership role in the digitization of the oil field, connecting data analytical tools, data lakes, and data mesh technologies. As the industry's pioneering database for subsurface reservoir data, RAPID has evolved and expanded over decades of commercial application and has become the primary data platform for a suite of independent, national, and international operating companies. Also in the second quarter of 2023, Core Lab collaborated with a prominent Middle East national oil company to implement Core's cutting-edge Advanced Rock Typing technology, branded as ART. The objective of this technology is to maximize the value of drill cuttings, which are small rock fragments recovered during the drilling process. Drill cuttings are typically not size or shape suitable for most of the traditional physical measurements that occur in the laboratory and are needed for detailed reservoir characterization.

When conventional core is not available, unraveling rock properties from drill cuttings can greatly improve reservoir evaluation programs. As one of Core's latest and most advanced digital artificial intelligence offerings, ART was employed to create a basin and formation-specific proprietary artificial intelligence model from existing geological and engineering data sets. The model is used to predict petrophysical properties from drill cutting samples where conventional core is not available. The generation of the ART model represents a significant advancement, enabling the national oil company to create an extensive data set that contributes to a more comprehensive understanding of reservoir variability. Moving to Production Enhancement, where Core Lab's technologies continue to help our clients optimize their well completions and improve production. Revenue for Production Enhancement came in at $44.5 million, down approximately 8% sequentially and flat YoY.

Operating income, ex items, was $5.5 million. Operating margins were 10% for the second quarter of 2023, down 270 basis points from Q1. Q2 results were negatively impacted by a sequential decrease in bulk international orders, along with lower than expected U.S. land activity. YoY, operating margins expanded approximately 120 basis points. For some operational highlights. In the second quarter, Core Lab continued to gain market acceptance for the company's proprietary HELIOS plug and abandonment system with a North Sea operator. The HELIOS system uses an innovative energetic technology. It was designed in conjunction with the operator and a wireline service company, specifically to help increase efficiencies with offshore plug and abandonment operations. North Sea abandonment regulations require new cement to be placed in the annular space of an existing well to fully isolate producing zones prior to abandonment.

Legacy technologies often struggle to accomplish this goal. Poor communication with the annular space during the removal of the original cement results in increased operation time and creates challenges in obtaining a high-quality final cement barrier. The HELIOS gun system, with its unique perforating design, has proven to provide increased efficiencies in the removal of the original annular cement, which, when combined with more efficient placement of the final cement barrier, yields a superior well abandonment operation in much less time. In the second quarter of 2023, an Oklahoma operator called upon Core's expertise in completion diagnostics to help them understand the causes behind the production variability from two land-landing intervals in a well with stacked horizontal targets. One of the two landing intervals was significantly harder to drill than the other.

Core's technical advisors recommended the incorporation of Core's SpectraStim proppant tracers and SpectraScan gamma ray logging technologies, along with FlowProfiler, water, and gas tracers to evaluate multi-stage completion efficiencies, well spacing, and inter well communication. The SpectraScan logs revealed effective completion efficiencies, also demonstrated the need to improve isolation between stages. Flowback water and gas diagnostic tracer results indicated no significant differences in production between the two landing zones. It was noted that significant inter well communication had occurred. Core's engineering staff advised the operator that the operator could drill and stimulate the less problematic landing zone with no compromise in overall well performance. In the process, the operator could save 5-7 days of drilling time at a cost savings of more than $1 million per well.

In addition, based on the extent of cross wellbore communication that was observed with the diagnostic tracers, the operator was able to optimize their completion program by widening their well spacing without reducing hydrocarbon production. That concludes our operational review. We appreciate your participation. Danielle will now open the call for questions.

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press Star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press Star, then two. The first question comes from Stephen Gengaro from Stifel. Please go ahead.

Stephen Gengaro (Managing Director)

Thanks, good morning, everybody.

Larry Bruno (Chairman and CEO)

Good morning.

Stephen Gengaro (Managing Director)

Two things from me. The first, just from a bigger picture perspective, when we think about the multiyear growth you're expecting, and I think others are expecting internationally, how should we think about the RD growth relative to activity, and what does that mean for incremental margins?

Larry Bruno (Chairman and CEO)

Yeah, I think, Steve, first is, it's a really good question, and I think it's a lot of focus within our company on that, too. The first thing I think that I wanna get across here is, as much as, and I said this last quarter, I think, as much as we'd like it to be, it's not y = mx + b yet. The linearity that we would all like to see is just not there yet. The client pacing on projects from the time we're awarded or even throughout the projects, is not quite up to what we've historically come to expect, but it's picking up in a nice term here.

I think what we see is that we can get on a path to getting into, call it high teens margins over the next year, year and a half. I think the growth there is gonna accelerate pretty quickly once we get more projects, sort of shingled in at the same time. Right now, if a project slips, and we just had a project in, for example, for Q3, that we incorporated into our guidance thinking. We had a project, a multi-well, core project, offshore, South Atlantic Margin. The client just informed us and pushed from Q3 to Q4. If we had more projects going at one time, you probably wouldn't see that in the results. Right now, that still affects the performance for the quarter.

I think, we, you know, we're on a nice path of growth there. I don't know that I get wed to 100% incremental margins every quarter. I do think that what we just accomplished and what we accomplished in the previous few quarters, seeing high incremental margins, just shows the operational leverage in that group will achieve that. I think we can see segment margins, EBIT margins, getting into the mid to high teens within the next year to year and a half.

Stephen Gengaro (Managing Director)

Great. Thanks. That's good color. The other question, if you look at Core Lab historically, right, the returns on capital and the free cash flow generation were extremely good, and over the last several years, it's been less so. I think, and I was just kind of looking for validation and thoughts on this, but I think a lot of that has to do with the RD business internationally being a real big driver of free cash flow. Am I thinking about that right? Should we start to see the free cash flow profile change if RD does what we think it's gonna do?

Larry Bruno (Chairman and CEO)

Yeah, I think that's right. I mean, the margins in that group and that, and our business model in that group are gonna put cash down very nicely. The cost of doing that business, we don't need any more roofline. We've got some expansion that we're doing. I talked about it in the release. We're introducing some new services in the Middle East. Yeah, I think that's gonna be the bulwark of driving free cash. Chris, anything you wanted to add to that?

Chris Hill (CFO)

No, I think that's exactly right. High incremental margins turns into free cash because there's not much CapEx required to grow from where we're at. In just the last several years, we've been at this sort of base level where we've got a similar footprint than what we had before. We have reduced staff, but again, we're kind of at a, at a low level, and free cash will grow significantly from there, driven by Reservoir Description.

Larry Bruno (Chairman and CEO)

On the Production Enhancement side, the service side of that business also can yield nice incrementals and generate nice free cash out of that as well. As we see demand internationally growing for more projects, we think absorption in our product manufacturing will also generate higher margins.

Chris Hill (CFO)

Right.

Stephen Gengaro (Managing Director)

Good. Thank you for the details.

Larry Bruno (Chairman and CEO)

Sure.

Chris Hill (CFO)

You're bet.

Larry Bruno (Chairman and CEO)

You're welcome.

Chris Hill (CFO)

Have a good one.

Operator (participant)

As a reminder, if you have a question, please press star one. The next question comes from John Daniel of Daniel Energy Partners. Please go ahead.

John Daniel (Founder and President)

Hey, guys, good morning.

Larry Bruno (Chairman and CEO)

Good morning.

Chris Hill (CFO)

Hi.

John Daniel (Founder and President)

Quick question on the X-SPAN technology you referenced in your release. You noted it was used with an Australian operator. I'm just curious how often you see that used in the lower forty-eight.

Larry Bruno (Chairman and CEO)

Yeah, we see it used over the global sort of field of play here, and it's got a lot of applications for wherever people have sort of split casing or they're trying to isolate a zone, or they've got corrosion problems, like the case that we talked about in the example from Australia, we'll see X-SPAN deployed. It uses an energetic trigger to emplace that patch, and it's a material science expertise in the company, too, that creates that bond between the pipe and the patch.

I think if we look out over any place where there's older fields or where there's highly corrosive production, either very high salinity, poor fluids or H2S, things that could lead to the corrosion of tubulars, there's X-SPAN opportunities.

John Daniel (Founder and President)

Okay. When you look at some of the, I know, obviously, don't know the, don't know the economics of X-SPAN, and all the numbers behind it, but is there a certain category of wells where it doesn't make sense because the production is so low? I'm just trying to get a feel for, like, old stripper wells and opportunity sets longer term.

Larry Bruno (Chairman and CEO)

Yeah, I think with older stripper wells, you get to a point here where remediation just doesn't make sense at all. It's just simpler to think about plug and abandonment.

John Daniel (Founder and President)

Yeah.

Larry Bruno (Chairman and CEO)

I, I'd say probably the biggest field to play for us is on higher dollar, more complex wells.

Chris Hill (CFO)

Right.

Larry Bruno (Chairman and CEO)

offshore.

Chris Hill (CFO)

It's definitely a less expensive alternative to replacing casing or doing other forms of remediation, so it could be an opportunity.

John Daniel (Founder and President)

Okay, got it. One, just sort of big picture, as you look across, you know, what looks to be a much improving international market, are there any markets that, to this point, have disappointed you, and when would you expect them to kick in?

Larry Bruno (Chairman and CEO)

A couple thoughts on that, John. A good question here. You know, we've talked about, obviously, the Middle East, South Atlantic Margin being real bulwarks for us, offshore West Africa. We talked about Namibia projects and a few others. I think all those look good. We did see some recent announcement about discoveries in Malaysia.

John Daniel (Founder and President)

Uh-huh.

Larry Bruno (Chairman and CEO)

I'd say that's been an area that had been lagging, but it's nice to see some discoveries being announced because that, as I've talked about for Core Lab, we're not really an exploration exposed company that much. When things get into development, sorry, appraisal, development, and production, that's really the wheelhouse for our two business segments. I think Asia Pac is hopefully starting to get back into play here after a pretty long, prolonged period of being quiet. I would also point out the, you know, we didn't really highlight it in this release, but our carbon capture and storage business continues to grow very nicely.

Saudi Aramco has joined our consortium, project, and so between the consortium and a number of proprietary projects we've got going on, that's bringing some nice play, both in the U.S. and from an international perspective, as that sort of emerging project spending on carbon capture and storage is attracting reservoir rock and fluid evaluation.

Don Crist (Senior Research Analyst)

Okay. Thank you for letting me ask some questions.

Larry Bruno (Chairman and CEO)

Sure. Appreciate it, John.

Operator (participant)

Thank you, John. The next question comes from Don Crist of Johnson Rice. Please go ahead.

Gwen Gresham (SVP and Head of Investor Relations)

Morning, Don.

Don Crist (Senior Research Analyst)

Morning, guys. How are you all this morning?

Larry Bruno (Chairman and CEO)

Right, Don? Good.

Don Crist (Senior Research Analyst)

Morning.

I wanted to ask about the Middle East. Obviously, it sounds like you got a lot of engagements across several different countries in the Middle East. How different is the drilling now of going into the kinda unconventional-type reservoirs versus what they've been doing in the past? Kinda where are they in that transition, from your opinion?

Larry Bruno (Chairman and CEO)

Yeah. They're very capable. All the NOCs are very capable there. Their attention over decades has been on conventional fields, that proportionally, that means a lot fewer wells in the past, they're gonna need to exploit unconventional resources. I'd say, they're quickly getting up to speed, understanding what it's gonna take to properly drill and complete, stimulate, horizontal wells, multi-stage horizontal wells, thinking about things about maximizing or optimizing well spacing, that plays right into our expertise and what we can bring to bear. One of the things that within Core Lab, within our Reservoir Description section is, we've done these multi-company, unconventional, reservoir studies in every basin in the U.S. and in a number of international basins.

What we see some of these NOCs in the Middle East doing is they're buying. We own that data from these consortiums. They're interested in acquiring some of that knowledge from us so they can rank, "Hey, how does this compare to an Eagle Ford? Or how does this compare to a Marcellus? Or how does this compare to a Barnett or one of the Permian Basin targets?" They wanna know and rank what they're getting, what they're finding in their local resources compared to some proven unconventional fields. Tied to that is, there's quite a bit of drilling and coring and fluid sampling going on with these unconventional reservoirs, and that's why we talked about in the release, we're bringing some of these technologies that were developed primarily for the U.S. market.

Now we get a chance to move those into an emerging unconventional market. I will add one other thought to that, Don, is I don't think outside of the Middle East there's many places where unconventionals are going to have a big sort of upside. There's too many difficult things that have to come together. You have to have the resource base, you have to have an accommodative government that's going to allow or land ownership that's going to allow for thousands and thousands of wells to be drilled, you're also going to need an incredible pipeline of people and material to support the high cadence that goes along with an unconventional project. The operators in the Middle East can clearly get that done. They've got the expertise, the will, and the sort of accommodative thoughts toward drilling the wells. That'll work.

They've got the natural resource to do it. A lot of other places on the planet, be tough to replicate that model that's worked in the U.S..

Don Crist (Senior Research Analyst)

Right, I agree. We saw that in the Frasnian basins, right?

Larry Bruno (Chairman and CEO)

Right.

Don Crist (Senior Research Analyst)

Turning back to the Middle East, where are they in that process of evaluating the unconventional resource? Are we still in the first or second innings of that, or how far down the pipeline are they?

Larry Bruno (Chairman and CEO)

I think that's right, in the, in the first few innings, on that. I'd say not everybody's in the same spot. Maybe some people in the third or fourth inning, some in the first or second inning, of that. We've had a long-term, call it over the last couple of years, we've done a, a project for one of the NOCs, evaluating, a whole basin, for them with multiple unconventional targets, and I'd say they're a little closer to getting to, call it the point of production.

Don Crist (Senior Research Analyst)

I appreciate all the color. Thank you. I'll turn it back.

Larry Bruno (Chairman and CEO)

Sure, Don.

Gwen Gresham (SVP and Head of Investor Relations)

Thank you, Don.

Operator (participant)

Seeing that there are no further questions, I would like to turn the conference back over to Larry Bruno for closing remarks.

Larry Bruno (Chairman and CEO)

Okay. I think we've got a pretty active earnings call day today, a lot of other calls going on. I think we'll wrap up here. In summary, Core's operational leadership continues to position the company for improving client activity levels in both the U.S. and international markets for 2023 and beyond. We have never been better operationally or technologically positioned to help our global client base optimize their reservoirs and to address their evolving needs. We remain uniquely focused and are the most technologically advanced, client-focused, reservoir optimization company in the oilfield service sector. The company will remain focused on maximizing free cash and returns on invested capital. In addition to our quarterly dividends, we'll bring value to our shareholders via growth opportunities, driven by both the introduction of problem-solving technologies and new market penetration.

In the near term, Core will continue to use free cash to strengthen its balance sheet, while always investing in growth opportunities. In closing, we thank and appreciate all of our shareholders and the analysts that cover Core Lab. The executive management team and the board of Core Laboratories give a special thanks to our worldwide employees that have made these results possible. We're proud to be associated with their continuing achievements. Thanks for spending time with us, and we look forward to our next update. Goodbye for now.

Operator (participant)

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.